The birds’-eye view of muniland

March 14, 2012

My Thomson Reuters colleague at Municipal Market Data, Daniel Berger, published an excellent report on the debt of the 40 poorest U.S. cities. His work is exclusively for MMD subscribers, but I excerpted the high-level part where he summarizes the general view the credit rating agencies have about municipalities. Here is what Dan had to say:


According to a recent report from Moody’s, the outlook for various… local governments remains negative. It cited a weak national economy and possible global risks to stock markets that could hurt state revenue. Another problem is the austerity measures of the federal government, which diminish any chance of more stimulus aid. This week Moody’s released the results of a default study of municipal bond issuers using default data from 1970 through 2011. They believe that revenue bonds will account for most of the troubled issuers and they foresee a “very small but growing number” of local government issuers defaulting on their debt.


Fitch has no single outlook for the local governments. However, localities face two big concerns. First, Fitch expects an inflation-adjusted 13% decline in property values. Taken together with the fact that assessments are catching up with previous declines, Fitch expects further declines in property tax revenues for local governments. These declines may pressure some local bonds.

Labor costs are local governments’ other big challenge. About two‐thirds of local government spending is for labor. The easy cuts to other sorts of spending have already been made. Governments might be considering gaining labor concessions. Decisions made related to labor costs will have the most impact this coming year on local governments’ financial situation. Whereas cuts to public safety previously were off the table, localities are now starting to consider that possibility. Meeting pension obligation gaps appears to be a bigger problem for local governments than it is for states.

Standard & Poor’s

According to an S&P report, most governments have started 2012 with far fewer resources than in the recent past. The report also discusses the role that liquidity continues to play in governments’ abilities to manage declining revenues. S&P does not expect “many defaults” and “even fewer are likely to occur among rated debt issuers.” However, this rating agency foresees the possibility of a greater divergence between strong and weaker credits emerging in 2012.

For the past two years S&P has consistently claimed to use its Global Rating Scale for municipal bonds. This week it announced changes in this methodology which will lead to the slight upgrade of nearly 3,800 (or about 1/3) of its outstanding municipal ratings. However, S&P refuses to call this a “recalibration.”

Conditions are tough in muniland. Choose your bonds wisely.

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